2018 (10) TMI 142 - AAR - GST

Construction services to railway subsidiary company attract 9% GST rate despite indirect railway connection

In Re: Tata projects Ltd.

The AAR Bihar ruled on GST rate for construction services provided to a subsidiary of Indian Railways. The applicant constructed a factory for an electric ... Rate of GST - Construction Services - Construction of factory for Madhepura Electric Locomotive Pvt. Ltd. which subsidiary of Indian Railways - Supply of services - Composite Supply - Special Purpose Vehicle - whether the construction services are connected to Railways or not? Held that:- The nature of activity undertaking by the applicant is Works Contract - However, the work completed by the applicant company cannot be held to be Resale/supply to railway company - the rate of GST applicable will be at 9%. Issues Presented and ConsideredThe core legal questions considered by the Authority for Advance Ruling (AAR) were:Whether the civil construction services provided by the applicant company under a works contract for the construction of a factory, roads, and other structures for a joint venture company engaged in electric locomotive manufacturing fall under the definition of 'works contract' related to 'railways' as per the GST rate notifications.Whether the supply of such services is covered by the concessional GST rate of 6% (3% CGST + 3% SGST) prescribed under Notification No. 20/2017-Central Tax (Rate) for works contracts related to railways.The correct interpretation of the term 'railways' for the purpose of GST rate applicability, including whether the definition provided under the Indian Railways Act can be imported into GST law.Whether the works contract executed by the applicant company is ultimately for the Indian Railways or for the joint venture company, and the consequent GST implications.Issue-wise Detailed Analysis1. Applicability of concessional GST rate on works contract related to railwaysLegal Framework and Precedents: The relevant legal provision is Notification No. 20/2017-Central Tax (Rate), specifically serial number 3(v), which provides a concessional GST rate of 6% on composite supply of works contracts defined under section 2(119) of the GST Act, when supplied by way of construction, erection, commissioning, or installation of original works pertaining to railways (excluding monorail and metro).Court's Interpretation and Reasoning: The AAR examined whether the applicant's works contract qualifies as a 'works contract' related to railways under the said notification. The applicant argued that since the contract was awarded by a joint venture company (Madhupura Electric Locomotive Pvt. Ltd.) formed as a Special Purpose Vehicle (SPV) involving Indian Railways, the works contract should be considered as related to railways and thus eligible for the concessional GST rate of 6%.Key Evidence and Findings: The applicant's representative clarified that the works contract involved construction of factory buildings, roads, warehouses, and other structures on land owned by Indian Railways but the contract was awarded by the joint venture company, not Indian Railways directly. The constructed assets would be transferred to the joint venture company, which would own and operate these assets and supply locomotives to Indian Railways.Application of Law to Facts: The AAR analyzed the definition of 'works contract' under section 2(119) of the GST Act and the scope of 'railways' as mentioned in the notification. The AAR noted that the notification refers to 'railways' generally, not specifically to 'Indian Railways.' The applicant had relied on the definition of 'railway' from the Indian Railways Act, which includes extensive infrastructure and assets connected with railways.Treatment of Competing Arguments: The AAR held that the definition of 'railways' under the Indian Railways Act cannot be imported into GST law, as per established legal principles that definitions in one statute cannot be imported into another statute unless expressly provided. The AAR referred to Supreme Court precedents emphasizing that tax statutes should be interpreted in their common parlance meaning and in the context of the statute's purpose and scope.Conclusions: The AAR concluded that the works contract executed by the applicant company was not directly related to 'railways' as understood in the GST law and the notification. The contract was with the joint venture company, not Indian Railways, and the constructed assets were not supplied to Indian Railways but to the joint venture company. Therefore, the concessional GST rate of 6% under the notification did not apply.2. Interpretation of the term 'railways' for GST purposesLegal Framework and Precedents: The GST Act and related notifications do not define the term 'railways.' The applicant sought to apply the definition from the Indian Railways Act, which is broad and includes land, infrastructure, rolling stock, and other assets connected with railways.Court's Interpretation and Reasoning: The AAR emphasized that in tax laws, terms must be interpreted according to their common parlance meaning unless defined otherwise. It referred to the Oxford Dictionary definition of 'railway' as 'a track made of steel rails along which trains run,' which is a narrower and more literal meaning.The AAR relied on judicial precedents that prohibit importing definitions from one statute to another, especially in tax matters, unless explicitly stated. The AAR noted that the Indian Railways Act's definition is a statutory definition relevant only within that Act and cannot be applied to GST law.Key Evidence and Findings: The applicant's attempt to rely on the Indian Railways Act definition was rejected based on legal principles and the absence of any GST law definition of 'railways.'Application of Law to Facts: The AAR applied the common parlance meaning of 'railways' and found that the works contract did not satisfy the requirement of being directly related to railways within the meaning of the GST notification.Conclusions: The term 'railways' must be understood in its ordinary meaning for GST purposes, and the broader definition under the Indian Railways Act is not applicable.3. Ownership and supply chain implications for GST rate applicabilityLegal Framework and Precedents: GST liability and rate depend on the nature of supply and the recipient of the supply. The notification's concessional rate applies only if the works contract is related to railways.Court's Interpretation and Reasoning: The AAR found that the applicant's works contract was with the joint venture company, which would own the constructed assets and not Indian Railways directly. The joint venture company would supply locomotives to Indian Railways as goods, not services.Key Evidence and Findings: The joint venture company was a separate legal entity and the applicant's services were supplied to it, not to Indian Railways. The constructed assets would not be resold or supplied to Indian Railways by the applicant.Application of Law to Facts: Since the supply was to the joint venture company and not Indian Railways, the concessional rate applicable to railway-related works contracts was not triggered.Conclusions: The works contract services are taxable at the standard GST rate applicable to works contracts, not at the concessional railway rate.Significant Holdings'The works contract under section 2(119) of the GST Act executed by the applicant company is not related to 'railways' as per the GST notification and hence the concessional GST rate of 6% under Notification No. 20/2017-Central Tax (Rate) does not apply.''The definition of 'railways' under the Indian Railways Act cannot be imported into GST law for the purpose of determining the applicability of concessional GST rates.''The term 'railways' must be interpreted in its common parlance meaning within the context of the GST law and notifications.''The works contract services supplied by the applicant company to the joint venture company do not qualify as services supplied to Indian Railways, and therefore the GST rate applicable is 9% CGST and 9% SGST.'